Difficult economic times have forced many individuals and families into pressing unsecured debt. A prolific for-profit “debt settlement” industry has consequently exploded, promising consumers a quick and easy resolution of their debts for pennies on the dollar.
Alternatively referred to as “debt settlement,” “debt negotiation,” or “debt adjusting,” such programs are touted by the industry as a viable mechanism for resolving unsecured debt without the stigma of personal bankruptcy.
In Washington “debt adjusting” is defined as “the managing, counseling, settling, adjusting, prorating, or liquidating of the indebtedness of a debtor, or receiving funds for the purpose of distributing said funds among creditors in payment or partial payment of obligations of a debtor.” RCW 18.28.010. “Debt adjuster, which includes any person known as a debt pooler, debt manager, debt consolidator, debt prorater, or credit counselor, is any person engaging in or holding himself out as engaging in the business of debt adjusting for compensation.”
The programs purport to offer heavily indebted consumers the ability to reduce their principal balance or interest rates or to actually settle the debt for a reduced percentage of the overall amount owed. The targeted demographic of these companies, in this regard, are invariably financially distressed consumers, including those located in Washington State, who seek to satisfy their outstanding indebtedness.
Although beneficial in theory, debt settlement programs often obligate the consumer to pay significant up-front debt settlement fees, which are typically drafted directly from the consumer’s bank account. In addition, consumers generally stop paying off their debts during the pendency of the program while their limited funds are diverted to debt settlement companies and consumed by up-front fees.
This often has the unfortunate effect of leaving the consumer in even worse shape. Instead of avoiding bankruptcy, consumers who enter into debt settlement programs often have interest and penalties accruing while the debt settlement company does little to actually settle the debts they promised to.
According to the debt settlement industry itself, sixty-six percent of consumers who sign up for debt settlement programs drop out prior to finishing; and of that figure, sixty-five percent exit the program without a single settlement. Telemarketing Sales Rule, 75 Fed. Reg. 45,458, 48,472-73 (Aug. 10, 2010). See also Debt Settlement: Fraudulent, Abusive, and Deceptive Practices Pose Risk to Consumers, Testimony Before the Comm. On Commerce, Science, and Transportation, U.S. Senate, GAO-10-593T (Apr. 22, 2010) (“[Federal Trade Commission] and state investigations have typically found that less than [ten] percent of consumers successfully complete these programs.”) The FTC has explained:
“Debt settlement is a high-risk financial product that requires consumers simultaneously to pay significant fees, save hundreds or thousands of dollars for potential settlements, and meet other obligations such as mortgage payments. Failure leads to grave consequences—increased debt, impaired credit ratings, and lawsuits that result in judgments and wage garnishments.”
Owing to predatory practices endemic to the debt adjusting industry, most states have adopted consumer protection statutes that either altogether outlaw for-profit debt adjusting or heavily regulate the activities of such debt adjusting business. Washington’s Debt Adjusting Act (“DAA”), as earlier mentioned, is found at RCW 18.28.
To protect financially vulnerable Washington citizens from the practice of “front-loading” debt adjuster fees, RCW 18.28.080(1) provides that a debt adjuster may not charge a consumer an initial fee in excess of twenty-five dollars ($25), thus ensuring that indebted consumers are not further burdened with substantial debt adjuster fees until such time that debt adjusting services are actually and successfully performed.
RCW 18.28.080(1), furthermore, provides that the fee retained from any one payment may not exceed fifteen percent (15%) of the payment and prohibits debt adjusters from charging excessive fees by providing that the total fee may not exceed fifteen percent (15%) of the debt listed by the debtor on the contract.
Washington’s strong public policy protecting consumers from debt adjusters’ illegal activities is also reflected in RCW 18.28.185, which declares that any violation of RCW 18.28 constitutes an unfair or deceptive business practice under RCW 19.86, the Washington Consumer Protection Act (“CPA”). As a result, violators of the DAA are potentially liable for treble damages and attorney’s fees and costs, under the CPA, in addition to the actual damages provided for in the DAA. RCW 18.28.190 further provides that any person who violates any provision of RCW 18.28 or aids or abets such violation is guilty of a misdemeanor.
The Legislature adopted the DAA to protect consumers from unfair business practices endemic to the for-profit debt adjusting industry. See Performance Audit of Debt Adjusting, Licensing and Regulatory Activities, Report No. 77-13, Jan. 20, 1978 at p. 11 (on file with Wash. State Archives, H.B. 86 (Wash. 1979). As a remedial statute, the DAA is broadly construed.
Spokane consumer protection lawyer Mack Mayo has aggressively pursued illegal debt relief companies for overcharging financially vulnerable Washington citizens for years. If you have fallen victim to an illegal debt settlement program and would like to speak with a lawyer, please do not hesitate to contact us at (509) 381-5091 or contact us here.